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A Note on Equilibrium Selection in Polya-Urn Coordination Games

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  • Giorgio Fagiolo

Abstract

We study equilibrium selection in coordination games played by a population whose size increases over time. In each time period, a new player enters the economy, observes current strategy shares and irreversibly chooses a strategy on the basis of expected payoffs. We employ a simple Polya-Urn scheme to discuss the efficiency of long-run equilibria under alternative individual decision rules (e.g. best-reply, logit, etc.). We show that the system delivers a predictable outcome only when agents employ either a linear or a logit probability rule. If agents employ deterministic best-reply rules, Pareto-efficient coordination can occur, but the actual outcome depends on initial conditions and chance. In all other cases, coexistence of strategies characterizes equilibrium configurations.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2005/05.

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Date of creation: 20 Apr 2005
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Handle: RePEc:ssa:lemwps:2005/05

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Keywords: Coordination Games; Equilibrium Selection; Pareto-Efficient vs. Risk- Dominant Equilibrium; Polya-Urn Schemes.;

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  1. Lawrence Blume, 1993. "The Statistical Mechanics of Best-Response Strategy Revision," Game Theory and Information 9307001, EconWPA, revised 26 Jan 1994.
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